TY - JOUR
AU - Prasad,Eswar S.
AU - Rajan,Raghuram G.
AU - Subramanian,Arvind
TI - Foreign Capital and Economic Growth
JF - National Bureau of Economic Research Working Paper Series
VL - No. 13619
PY - 2007
Y2 - November 2007
DO - 10.3386/w13619
UR - http://www.nber.org/papers/w13619
L1 - http://www.nber.org/papers/w13619.pdf
N1 - Author contact info:
Eswar S. Prasad
Dyson School of Applied Economics and
Management
Cornell University
301A Warren Hall
Ithaca, NY 14853
Tel: 607/255-5687
Fax: 607/255-9984
E-Mail: eswar.prasad@cornell.edu
Raghuram Rajan
Booth School of Business
University of Chicago
5807 South Woodlawn Avenue
Chicago, IL 60637
Tel: 773/702-4437
Fax: 773/702-0458
E-Mail: raghuram.rajan@ChicagoBooth.edu
Arvind Subramanian
Peterson Institute for International Economics
1750 Massachusetts Ave, NW
Washington, DC 20036
E-Mail: asubramanian@piie.com
AB - We document the recent phenomenon of "uphill" flows of capital from nonindustrial to industrial countries and analyze whether this pattern of capital flows has hurt growth in nonindustrial economies that export capital. Surprisingly, we find that there is a positive correlation between current account balances and growth among nonindustrial countries, implying that a reduced reliance on foreign capital is associated with higher growth. This result is weaker when we use panel data rather than cross-sectional averages over long periods of time, but in no case do we find any evidence that an increase in foreign capital inflows directly boosts growth. What explains these results, which are contrary to the predictions of conventional theoretical models? We provide some evidence that even successful developing countries have limited absorptive capacity for foreign resources, either because their financial markets are underdeveloped, or because their economies are prone to overvaluation caused by rapid capital inflows.
ER -